Executive Action Causes Market Reaction

January 30, 2017

Dennis Gartman is editor and publisher of The Gartman Letter, and strategic advisor of the AdvisorShares Gartman Currency Hedged Gold ETFs (GEUR & GYEN). He regularly contributes to AlphaBaskets and lends his institutional insight to educate advisors and investors about commodities and the forex markets, including about trading gold in different currency terms.

The US dollar is weaker; but has risen from its worst levels as the dealing day moves from Asia to Europe. At one time earlier today in Asian dealing the Yen/dollar had traded all the way to 114.25; it is 114.70 as we write and send TGL to our readers around the world. Further, the EUR had traded all the way to 1.0745 briefly and is now 1.0688, barely above the closing levels Friday in North American dealing.

The early dollar weakness was predicated upon dismay amongst global investors evolving out of President Trump’s executive decision to stop any and all access to the US by those foreign nationals… even those with proper visas and/or green cards… travelling from seven predominantly Muslim nations. Investors were shaken by that news, fearing that if the President was willing to stop legal visitors to the US then what may stop him from sequestering capital that belonged to foreign investors? This may be a bit far-fetched and may be beyond the bounds of reason, but it is a fear nonetheless and actions have been taken on those fears. Those fears have subsided a bit with the decisions by several courts here in the US to “stay” the President’s action, but they can return at a moment’s notice.

The courts, however, have proven that this does indeed remain a country of laws, with checks-and balances upon the Executive and upon the legislature and that is a very good thing.

Concerning the recent decisions toward trade protection, a trade war, or even a lesser dispute within NAFTA, will do far more damage to Mexico than it will benefit the US. The United States accounts for about 80% of Mexico’s exports, and any deviation from what the NAFTA has put into effect would immediately expose the risks of Mexico’s dependence on the U.S. market. Doing damage to an ally such as Mexico is fraught with danger, for others who trade with the US shall have no choice but to consider us to be a less trustworthy partner.

Further, if Mr. Trump believes that “segregating” Mexico in this manner… and we have chosen this word specifically for its obvious implications…will stem the movement of people across the border into the US he will soon have to understand that as Mexico’s exports to the US fall, inflation will increase as the peso depreciates; capital will flee Mexico; supply chain disruptions will erupt… and the economy there will plunge. As a result, cross border migration from Mexico to the US will increase rather than decrease. What Mr. Trump has apparently not understood is that as the NAFTA has raised Mexico’s economy it has changed the flow of people across the border to where the net migration is to Mexico and out of the US, not from Mexico to the US.

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